Acclaro Partners' Research and Strategy Weblog

Competitive Intelligence by Functional Area

Corporate Strategy -- The smaller the business unit (and the smaller the competitors, and industry sectors), the more critical is competiitve intelligence for making sound strategic decisions.  Competitive intelligence (CI) augments an internal understanding of the competitive landscape, competitor capabilities, and most importantly, competitor intentions.

Competitive Strategy -- Since strategies and tactics roll down from a corporate goal or objective, it is important to understand that core goal as a starting point.  Does the competitor want to focus on growth or profitability?  Is it concerned about quality or service or price leadership?

Financial Strategy -- Financial strategies and intentions related to balance sheet decisions can be uncovered, as well.  These discoveries are helpful in developing an assessment of the owner’s commitment to the business over the long-term.  Where is the owner investing?  How much is the owner willing to risk today in order to generate future cash flows?

Product Strategy -- Since product strategy is all about differentiation, we seek input on just that – how the competitor perceives its products or services to distinguish themselves in the marketplace.  Not just existing products.  New ones, too. 

Brand and Communications Strategy -- There are four main promotional tools available to any company (advertising, personal selling, sales promotions, and publicity).  Which one does the competitor focus upon?  And what is the core theme, main idea, or message that permeates customer communication efforts of the organization? 

Distributions Strategy -- Distribution strategies involve planning how to pass the product from organization to organization, entity to entity, until it reaches the final destination, the end-customer.  We can diagram what percentage of sales go through each channel of distribution (distributors, wholesalers, dealers, manufacturer’s reps, direct sales force).  Even starting at the point of sale, one can determine how the customer interface works, how orders are placed, and how orders are fulfilled.  When we study distribution, we look for the current state of reality in how products are distributed, and we look for the intended future state, as well.

Sales strategy -- The sales strategy reveals the core sales steps being taken to achieve the corporate goal.  If the goal is to become the easiest player to do business with, what are the steps the sales organization is taking to make that goal happen? Who are major accounts, and how does the competitor select key customers? 

The sales breakdown by market served helps shed light on the Company’s priorities and successes.  We can also determine the breakdown between domestic and foreign sales.  It can be helpful simply to ask salespeople, who are often highly opinionated, where the company’s priorities lie.

Pricing strategy -- When a competitor prices its products or services, it may have one of a number of possible goals in mind:  profit maximization, revenue maximization, quantity maximization, price leadership, etc.  Depending on the goal in mind, it may select from a range of possible pricing strategies:  competition-based, cost plus, creaming/ skimming, loss leader, market oriented, penetration, dynamic, target, etc.  We are able to determine which goal and which strategy a competitor has selected.

Operations strategy -- Operations ties directly into the corporate goal, of course.  For example, if the goal is to be known as the low-cost and low-price producer, what specific actions are happening in operations to drive costs down?  What are the operations strategies to achieve the corporate goal?

An interesting place to dig deeper is the value chain.  What value-added steps occur where, before reaching the customer (e.g., degree of manufacturing integration, utilization of unique materials, utilization of unique or proprietary processes, etc.)?

While facilities and labor do not tie directly into intent (corporate goals and strategies), the make-up of the facilities and labor force can reveal capabilities. For example, learning about the age, condition, and equipment utilized in a manufacturing plant can help assess production capacity. 

R&D and Innovation Strategy -- The innovation or R&D strategy reveals the steps that the R&D department is taking to ensure it carries out the goal of the corporation.  What is the area of focus or emphasis for R&D (e.g., true innovation and novel concepts, updating of existing products, value-added features and benefits for existing products).  The origin of the competitor’s R&D focus and activities may be internally driven programs, customer/market demands and unmet needs, competitors’ activities, etc.  Our role is to determine not only what the source of the R&D focus is, but what the emphasis and strategies truly are.

The Increasing Importance of Market Due Diligence

Market due diligence, often the most critical aspect of diligence, is becoming even more important. The risks of doing deals are higher than they have been in recent memory.  Drivers (related to lender interest in market data, the need for industry/sector attractiveness assessments, the demand for analysis of the target’s attractiveness/positioning, equity vs. debt allocations, and other issues) are making buyers even more apt to utilize outsourced market due diligence.

Unlike other aspects of due diligence, market due diligence does not base its findings on information provided by the company.  Instead, market due diligence involves gathering data from industry experts, competitors, customers, and sometimes suppliers and other third-party market participants.  In niche markets, it is essential to gain the perspective not only of customers, lost accounts and prospects, but third party market experts, and, most importantly, direct and indirect competitors.

Market due diligence therefore provides a “more accurate, independent, future-centric, and ultimately more reliable view of the…prospects of the business.”  (“Counsel: Commercial Due Diligence and Acquisitions,” The Edge Malaysia, Issue 759, Marcus van Geyzel, June 15, 2009).

While those involved in M&A seem to hear more about financial and legal due diligence, “the core of every transaction” is the market due diligence.  “Financial and legal aspects are only tools necessary to complete the transaction.” (KPMG Benchmarking Study – Internal Commercial Due Diligence, February 2009).  Market insights are the most critical aspect of all due diligence because they are not only helpful in facilitating a Go/No Go decision on the deal, they are also instructive in pointing out a strategic direction for the newly acquired target, post-closing.  The ability to gain access to a vast array of market experts (customers, competitors, third-party market participants) is one of the key benefits of outsourcing market due diligence.

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Competitive Analysis -- An Introduction

Most companies have a fairly good handle on competitor capabilities.  The managers have created at least one SWOT chart taking into account internal strengths and weaknesses relative to your competitors.

Yet the real goal of competitive analysis – to predict the future plans and objectives of competitors – is where competitive analysis can be particularly revealing. 

Competitive analysis is both a vehicle, an instrument, a tool used to serve as the foundation or infrastructure of strategy, and it is an end, in and of itself.  In his 1996 book Competitive Intelligence, Larry Kahaner defined competitive intelligence as "a systematic program for gathering and analyzing information about your competitors' [or acquisition target's] activities and general business trends to further your own company's goals." 

Most practitioners of competitive analysis have years of experience, often in other analytical arenas, and are able to spot trends and identify patterns efficiently.  Competitive intelligence operatives gather their insights overtly.  Secondary sources, such as the Internet, published material, and speeches may be browsed, but the most valuable and most important research tool is the telephone.  Analysts developing primary research are well-spoken, articulate professionals who are able to develop interactive conversations with industry experts.

Telephone research is effective for a number of reasons.  The insights that are gained are timely.  Since the interviews are "live" and interactive, the researcher can ask the respondent specific questions and follow-ups that act as cross-checks and verify information obtained through other means.  Merely researching published information in the public domain does not offer this advantage.  Clarification of confusing issues or apparent contradictions is much easier when the source is on the telephone.

Contact with numerous experts brings researchers many steps closer to the knowable "Truth".  Instead of basing decisions on a one-sided perspective, acquirers are able to develop a complete understanding of the trends affecting an industry overall and the general competitive landscape of a marketplace which are critical to executing value-creating acquisitions that afford competitive advantage.

Below are some elements of an effective competitive analysis process:

·   Focused on a list of information points critical to a particular (evolving) strategic decision.

·   Ongoing and never-ending.

·   A data collection plan encompassing primary (first hand from competitors), secondary (published data), and tertiary (discussions, largely online) insights.

·   A collection and analysis database that is accessible to key decision-makers throughout the organization.

·   Assessments (continuously) of the intelligence gap.

·   An analytical function that ties information to strategic implications for corporate strategists.

·   Outputs that conform to the needs of the decision-makers (alerts, projections, background context, strategic plan implications)

After establishing an ongoing process, the next step is to develop a list of all competitors.  It is useful to know where your competitors earn their revenue, and ideally, the percentage gained from each product or service area in each market segment.  They may be earning revenue in areas you never considered becoming involved.  If you can determine that the level of profitability in these areas is significant, there may be an opportunity for you.

By speaking with competitors, competitive analysts should be able to gather candid insights about the perceived opportunities and threats that competitors see.  After determining what each competitor sees as a potential opportunity or threat, it should be relatively easy to determine what each company's primary and secondary goals are.  After determining the Goal, the next logical question is to ask how the competitor plans to accomplish the goal.  Professional competitive analysts leverage the client’s time by scrutinizing informational puzzle pieces and developing pictures that shed light on the direction of a company's corporate strategy, marketing plans, production schedules, and more.  The result is a prediction of the competitor’s intentions and strategies.

Executives who ignore competitor opportunities are doomed to develop strategies they cannot (or do not wish to) accomplish. 

 

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Discovering Customer Unmet Needs When "There Are None"

Organizations differentiate by identifying customer unmet needs through innovation and value added services even when the customer conveys “we do not have any unmet needs.”

Many companies incorrectly assume they understand the needs of their customers.  Others are slow to innovate and are comfortable providing the same products and services year after year.  However, the best organizations discover ways to identify unmet customer needs and turn them into opportunities.  By truly identifying customer unmet needs, organizations increase the opportunity for improving profitability and market share.

Why Do Customers Communicate They Do Not Have Any Unmet Needs?

When asked, customers routinely indicate they do not have any unmet needs.  They may have needs and are not communicating them, or they may have needs that are not clear or realized at the present time. 

  Customers’ current needs are met by other suppliers.

  Competitors may be providing solutions or services that you are not offering.

  Customers only want to share positive feedback with their suppliers.

  The customer may have needs they are not even aware of, that can only be be met though supplier innovation.

  The customer’s business is changing and the customer may not even understand their changing needs.

  Customers may recognize their need, but not want to rock the boat or complain to their suppliers and see price increases.

The Solution

The solution is to fully understand the purchase decision factors as well as the overall business strategy of the firm.  This includes talking to different internal stakeholders as well as external contacts. 

 

The key is getting the lost customer to communicate the details behind their decision to change vendors.  The best way to get the customer to reveal unmet needs is to utilize the services of a third-party research firm.  Ideally, the firm is highly experienced in “blind” conversations with customers, prospects, and lost accounts.  Acclaro Growth Partners is such a firm. 

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Examples of Strategic Research-Based Consulting Projects

After years of working on strategic research assignments, we recognized that a comprehensive list of project types would be helpful for clients and prospects.  There are nine types of strategic research projects that we have conducted.  Reviewing this list may help you in determining of you have a strategic research need, and how to describe the need to ensure a strategic research firm is focused on the appropriate task at hand.

New market entry Go/No Go support -- Assessing the size, growth prospects, opportunities and threats, critical success factors, trends and dynamics, customer needs and competitor capabilities and intentions can be extremely helpful in making a decision about whether a new market is worthy of entry.

Market map.  Particularly helpful for a CEO who is new to the organization and the industry sector, a market map provides a detailed primer on the landscape of the marketplace, customer segments, competitive positioning, market opportunities and threats -- as it all stands today. 

Prioritizing channel partners for quick wins and growth – We research and report on the down and dirty of which trade shows to attend, which journals to buy, where to promote and advertise, how to influence and build the brand for the marketplace, which partners to seek alliances with, etc.

Developing a three year plan with goals, tactics, milestones, champions, accountabilities – We create a tactical roadmap designed to fulfill the strategic goal(s) of the company or business unit.  After conducting external research, in tandem with management, we offer analysis, options, and recommendations.  After discussing our recommendations and managament's ideas, we collaboratively develop the actionable plan for management to execute over time.

Evaluating an existing business plan and suggesting improvements –   We have evaluated, after conducting extensive external research, the elements of the company’s existing strategy using simple evaluation criteria.  We then offer up recommendations of our own to augment this strategy. 

Prioritizing market segments for growth – No company can, or should, pursue every segment with equal energy.  We determine which product, end-use, or application segments represent the greatest opportunities for growth.

 

Prioritizing customer segments by geography, product area, or channel -- Extensive qualitative feedback from customers on expected purchase volume levels, loyalties to existing suppliers, unmet needs, switching costs, and purchase decision criteria can be quite helpful in deciding where to focus sales resources.

 

Merger/Acquisition Market Due Diligence -- We evaluate the target's marketplace to determine its attractiveness, their customers to determine loyalty, and the competitors to understand their capabilities and intentions.  In the end, we offer a "thumbs-up" or a "thumbs-down" on the attractiveness of the acquisition or merger target.

 

Help solve an external market, competitor, customer, or supplier "problem "-- Solving large-scale problems, that are not going away on their own, often requires facts and analysis.  We identify the opportuniites and lessons to be learned from a dying market, a major lost customer account, or a formidable competitive rival.

Considering each of these nine examples, are there situations or scenarios that your company is facing that could benefit from external strategic research?  If so, feel free to call Kit Lisle, our Managing Partner on 703.860.3355 with any questions or comments or feel free to contact him via email: kit@acclaropartners.com 

Our web address is www.acclaropartners.com

Organizing Sales Assets for Maximum Effectiveness

Primary research, which for us means telephone conversations with customers, competitors, and other market experts, can be extremely useful in determining how to orient salespeople.  Whether your salespeople are organized by geographic regions, product types, end-use markets or application areas -- primary research will result in cold, had, facts to help you decide where to apply more and fewer resources.  And doing so, will help you take advantage of opportunities you would otherwise be likely to miss.

From a geographic standpoint, suppose you have sales assets spread throughout Europe, haphazardly covering the continent largely based on where these salespeople happen to live.  Wouldn't it be nice to know that customers in the Benelux countries are most likely to have a high need for your product.  Or that customers in Scandinavia not only have a need, but place "Price" as very low on their hierarchy of purchase decision criteria.  Or that customers in Poland feel ignored because there are no suppliers nor sales reps appropriately serving that market...These kinds of insights, combined with the knowledge of where competitors are active, and where customers have relatively low interest levels, can be quite helpful in helping you decide where to allocate your sales resources.

And if your salespeople are organized by product area or end-use application area and not by region, it can be equally important to conduct primary research.  Rather than reactively assigning salespeople to product areas that have historically high levels of demand, proactively place salespeople where demand is on the increase.  The best way to do this is to have a qualified, objective, third-party develop insightful, dynamic, two-sided conversations with customers.  The issues to address with these customers, prospects, and lost accounts include unmet needs, trends and dynamics, purchase volume expectations, switching costs, purchase decision criteria, and so on.  Comparing the opportunities across major product areas will enable you to decide where to allocate more sales resources.

Similarly, if your sales team is organized by end-use application or end-use market served, you will want to conduct primary research to address these same issues -- unmet needs, trends and dynamics, purchase volume expectations, switching costs, purchase decision criteria.  And you will compare the presumed opportunities of each end-use application or market served.  The most exciting ones are obviously where you will apply more sales resources.

Applying sales resources based purely on historical sales volumes is worse than looking in the rear view mirror.  You may be missing out on opportunities in which the customer locks in a relationship or prefers a sole-supply situation.

Primary research results in the quantitative and qualitative insights that enable you to allocate sales resources proactively to take advantage of current, and future, customer requirements. 

Gradual Improvement in Deal Flow Activity

As a business strategy due diligence consulting firm partnering with many of the leading middle market private equity firms, Acclaro Growth Partners has a front row seat on the state of private equity acquisition activity in the middle market.

In spite of a general slowdown in deal activity that began in the latter half of 2007 the middle market we support outperformed the overall market through the first three quarters of 2008. However, deal flow in all segments came to a screeching halt when the credit markets froze in September of 2008. New deals involving platform companies continued to languish through the first half of 2009 but an increase in portfolio company strategy development and “bolt on” company acquisition helped to offset the lack of platform acquisitions.

However, the good news is that the level of activity is slowly improving. A number of factors are contributing to the improving environment.

1.    An improving economy

2.    An improving stock market

3.    Improving credit markets and availability of debt financing

4.    Improved portfolio company performance

5.    Ability to place valuations on corporate assets

At the same time the structure of the deal continues to evolve in ways that differ significantly from the pre-2008 structure. Today the deal is likely to:

1.    Consist of a higher equity percentage, 50/60% versus 20/30%

2.    Debt financing remains difficult and expensive - but increasingly available

3.    Earn outs, seller financing and rollover equity are frequently components of the deal

While the environment is improving and is expected to continue to gradually improve, the days of acquisitions that are highly leveraged, cheaply financed with a high likelihood of assured returns is currently a thing of the past. With so many added risk factors and a reduced margin of error it is understandable that private equity groups are turning more frequently to third party business due diligence firms to assist them with their business due diligence and evaluation of the business thesis of the target firm.   

High Level Retail and Consumer Trends (Based on 2009 Projects)

Considering our retail and consumer project experiences in 2009, we came up with a list of five trends that seem to be fairly pervasive.  Two concern retailer expectations for consumer product suppliers.  And three involve opportunities that retailers are seizing on their own.  Below we share with you our observations:

Retailers are increasingly relying on vendors for category management – A concept that Wal-Mart started decades ago is now the norm rather than the exception across almost all retail channels.  Retailers recognize that their vendors have their fingers on the changing pulse of the consumer in their category far better than they do.

Retail store layout changes are far more dynamic than in the past – Floor plans are changing more quickly than ever to accommodate emerging niches such as wellness, organic, convenience.  Numbers don’t lie and retailers will do anything to optimize their sales per square foot.

Green vendors are in demand – Green is rapidly becoming a critical attribute in almost every consumer category.  Expansion of ingredient labeling is bringing it to the forefront.  Supply chain optimization to reduce your carbon footprint now a major talking point.  Watch Earth Day 2010 as an indicator of this trend….

Consumer price sensitivity has professionalized store brand management – Generic store brands are bigger than ever.  Retailers are hiring top guns from consumer package goods companies to build their store brands and are using the same branded consumer product goods rigor to do it.

China is now more than just a source of cheap product – With US consumption in the doldrums, and western Europe not much better, many consumer product companies and retailers are looking east for growth.  While expectations are modest, getting the experience early is expected to generate leadership over the long run.

For a more detailed examination of the issues, to think through implications for your company, or to pose a question, simply give us a call or send an email.  Kit Lisle is the Managing Partner, and can be reached on 703.860.3355 x105 or by email, kit@acclaropartners.com

 

“Co-Investing” in Strategic Research Projects

Companies considering hiring research-based strategy consulting firms may wish to consider a creative approach to selecting their next vendor.  “Co-investment” requires a prospective new vendor to invest in the project, in the form of some pro-bono work during the project framing and scoping stage.

 

There are four pre-conditions for this arrangement:

 

·         Your company should be struggling with a rather strategic decision – new market entry, acquisition, coping with a new competitive threat, handling a new customer opportunity, etc.

·         You are not entirely sure whether to proceed with the project – you need more data.

·         You are able to boil the major issues or concerns down to one research objective at this stage.

·         One consulting firm is particularly compelling, but you have no experience with this firm, and need a live example to see what they can do.

 

In contemplating your company’s strategic decision, there may be a recognition that more facts and data are needed in order to make the decision.  At this point, it is not clear if the research should be outsourced.

 

It would be helpful to better understand the benefits of working with an outside vendor.  A live, relevant example of the quality of output that could be expected would facilitate a comparison of internal value vs. external value.  And perhaps seeing the answer to a particularly nagging or poignant question would help to frame the entire project.  Suppose the strategic decision that you are making involves new market entry.  At this stage, learning about the growth rate of this new market would be particularly helpful.  If the growth rate is slow or negative, market entry is not warranted (and the project might not be, either).

 

Boiling your major concerns or questions down to one issue for the consulting firm to study is not easy.  Depending on the strategic decision you are trying to make, the key issue may involve a competitor capability or direction, a customer segment’s unmet needs or purchase decision criteria, a market’s size or growth, or issues related to trends or dynamics in the market.  The issue that you decide upon should be clear and “self-contained” enough that the potential vendor can conduct the research necessary to address the issue in a week or two.

 

The prospective consulting firm may be interesting and compelling, but you have never worked with them before.  Getting a taste of their capabilities before shelling out the big bucks could be quite helpful.  Quality of the data, quality of their interaction with your firm, and the analysis and actionability of their recommendations can all be tested.  By the end of the one-to-two week exercise, you should definitely have a better sense of whether you feel comfortable working with this group.

 

The consulting firm, meanwhile, is being asked to “invest” in this research.  They need to believe that they have a legitimate chance of winning a decent-sized project.  Candid conversations with the consulting firm and the client need to take place to iron out issues such as rough size and scope of the project, timeline, decisions being made as a result of the project, and the people involved in the project on the client end.  It is obviously the consulting firm’s prerogative to decline to take on the “coinvest” assignment.  In order to encourage the consulting firm to consider this arrangement, you may need to be candid about this firm’s likelihood of winning the real assignment.

 

After the “coinvest” one-to-two week project is complete, you can decide whether it makes sense to proceed with the real project or not, what the core issues are to study, and which firm you will be working with.  The creative approach can be highly beneficial.

 

Keep Acclaro Growth Partners in mind.  Our website is www.acclaropartners.com

 

"Co-Invest" Options for Pre-LOI Business/Market Due Diligence

Assumptions, assumptions, assumptions...In the weeks leading up to the presentation of a Letter of Intent, potential acquirers make many assumptions about the market positioning and business strategy of the acquisition target.  Some are bigger guesses than others (how much share will the company take from competitors).  Some are more important than others (how fast will the company grow its ebitda margins).  It makes sense to prioritize your laundry list of educated guesses down to one or two that are both a.) highly critical to your valuation model and b.) heavy on the "guess" and light on the "educated."

With only one or two important market/strategy issues to resolve and a week or two to gather data, you can decide if it makes sense to outsource the research.  A research-based strategy consulting firm is likely to get the work done faster, more objectively, and with more analytical rigor than an internal diligence team can -- mainly because the outsourced option is focused on the singular task at hand.

Paying for the pre-LOI research is a risky proposition.  What if you decide not to even submit the LOI?  What if you do not win exclusivity? What if the deal never closes?   Fortunately, some research-based strategy consulting firms are conducting this highly targeted, short-time frame research on a "co-invest" basis.  In other words, they are doing the pre-LOI research at no charge to their client under the assumption that they will win a larger market/strategy due diligence assignment if their client wins exclusivity.

So, for acquirers that have already vetted a business strategy due diligence consulting firm, feel comfortable with that firm, and intend to hire that firm for the full-blown diligence work, the pre-LOI research "co-invest" option may be a good idea.

The consulting firm will certainly have a leg up on its competition, and may be just as interested as you are in this concept!

Visit www.acclaropartners.com to learn more about our capabilities.